Shanghai Express

We can feel the wind of financial freedom blowing over China. It is only a breeze, not a blizzard to be sure, but it feels good nonetheless. It represents a welcome omen for the many Chinese now jumping through hoops to find a way to get money out of the country to purchase real estate in the US. Useless to say, it looks like a blessing for American home-sellers looking for buyers.

The big news hit the street last week: the Chinese government officially launched the gutsy experiment of starting to loosen its grip over the financial sector and let the market rules prevail. We’ll see about that of course. Stay tuned.

The experiment/test has a name: “China Pilot Free Trade Zone.” It is taking place in Shanghai, arguably the largest city in China and even in the world (nearly $22M), and the undisputed symbol of the country economic boom.

Historical commercial link between the East and the West, Shanghai is not only a major international financial center (3rd stock exchange in volume of trade), but China’s flagship in commerce, technology, arts & media.

The so-called Free Trade Zone is now confined to 11 square miles in the Pudong district, bordering the East China Sea and today comprised of an airport, a harbor and a multitude of docks and warehouses. The scenery will soon change.

Under the terms of the pilot program, banks located in the zone will escape regulators’ diktats. They supposedly will be free to offer better financing terms, such as lower interest rates and more borrowing opportunities, to both individuals and businesses. The added latitude should also include facilitating currency exchanges, allowing banks to expand operations overseas and making it possible for foreign banks to set up shop and compete for business within the perimeter of the zone.

A big deal it is. The news, which you may qualify as a modern chapter of the “Cultural Revolution,” is producing much awaited optimism inside and outside China. The gap between communism and capitalism has never looked smaller.

Having said that, it would be prudent to wait & see how much is actually going to change, how soon and for how long. Don’t buy your ticket to the celebration party just yet. Things don’t move too terribly fast in a country 2,234 years old.

Case in point: within hours from the official unveiling of the experiment, the government had what appears to be an after-thought, or a remorse. It published a list of restrictions (200 already) severely limiting foreign investment. No matter what happens, the draft copy will be reviewed, tweaked or corrected in 2014, if not before.

Meanwhile, you can bet that national banks, foreign banks and various businesses are going to rush trying to open a front in the free trade zone in order to grab a piece of the cake. The expected returns promise to be so juicy that those institutions left out of the dance floor are likely to be a bit upset, just like the would-be-borrowers who cannot do business with one of the “local” banks.

I hope –and trust- that the Shanghai pilot program will prove to be a win-win operation for China and the US. Believe it or not, the sustainability of our real estate recovery depends also on the Chinese buyers’ ability to purchase homes and businesses on our land. This is especially important on the West Coast and particularly true at the high end.

In a country where the new-rich are now legion and the middle class is already bigger than the entire US population, liberalizing the financial sector, even if only a little bit at-a-time, will undoubtedly be a game-changer that we can benefit from.